While bootstrapping, crowdfunding and VC funding tend to get all the press, the truth is that standard bank loans continue to quietly and effectively help untold numbers of businesses establish a foothold, expand their reach, and shorten the path to achieving short- and long-term goals.
Because the possibilities can seem endless, however, it is essential that you have a strategy for your loan to ensure you are getting the biggest possible bang for the buck.
Build Your Strategy Before You Apply
Borrowing money should be done with a specific goal or purpose. Common reasons may include startup costs, exploiting favorable opportunities, equipment investment or expanding operations.
To make sure you have a well-thought-out strategy, take a few preliminary steps:
- Document your strategy to collect your thoughts and make it easier to establish your case when you apply for your loan.
- Talk to stakeholders to ensure the intended purpose for the money will actually help drive company strategy. Stakeholders may include co-owners of the business and your CFO or accountant.
- Create financial projections with your business goal in mind to get a sense of how much you'll need to borrow. Remember to add in loan payment estimates as well to confirm you're able to stay current and still maintain healthy cash flow.
- Explore all of your loan options before deciding. Your banking partner can help you figure out which options work best for your business.
What to Expect During the Application Process
Applying for a business loan can be a long and detailed process. You can expect lenders to ask a number of questions about your credit, business, and growth strategy. You’ll be required to bring a number of items of paperwork including:
- Forms that lay out your personal background and financial statement
- Your personal and business income tax returns for several previous years
- Your business license or certificate, as well as any loan application history
Doing the pre-work described above will make this process go more smoothly and demonstrate you have a defined plan for how you intend to help your business grow.
Business loans, it should be noted, typically have a shorter repayment time frame than personal loans. And while personal loans don’t always require collateral, business loans often do in the form of inventory or real estate. Owners also sometimes need to sign as guarantors.
Interest rates will vary based on your needs, credit score and the health of your business. If you qualify, however, you can usually expect to pay between 7.25% to 9.75% on the typical small business loan.
Keep Monitoring Your Progress
The best practice for taking out a small business loan is to align your borrowing with business strategy to make an informed decision—that approach continues after you’ve gotten your loan.
Stay focused on your intended strategy and periodically meet with your stakeholders to make sure you’re on track. A mid-year check-in can be very helpful in terms of ensuring your growth plans are making progress and you are leveraging your loan in the best way possible.